Productivity, investment and profitability

Radical economic historian Adam Tooze recently tweeted that “Whenever I see figures for the decline in the (advanced economies) AE productivity growth rate I am left puzzling: do we really have an explanation? Do we really have an explanation?”

Well, I think we do. As I outlined in a previous post, over the last 40 years and especially in the last 15, there’s been a broad-based slowdown in output per hour worked across the major economies. For the top G11 economies (which excludes China), it’s currently running at a trend rate of just 0.7% p.a.

Russia’s productivity level is falling, while that of Italy and the UK is hardly moving.

But there is also another very simple explanation. There are three factors behind productivity growth: the amount of labour employed, the amount invested in machinery and technology and the X-factor of the quality and innovatory skill of the workforce. Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the unaccounted-for (residual) contribution to productivity growth after capital invested and labour employed.

And TFP growth slowed after the Great Recession in most economies, except for China and India. In the US, all three factors driving productivity growth were at their strongest in the ‘hi-tech’ decade of the 1990s, but in the 2000s, all factors slowed sharply.

Indeed, the slowdown in productivity growth in the AEs began in the 1970s. And this is no accident.

Decomposing the factors driving productivity growth clarifies things. Slowing investment in productive assets, particularly hi-technology led to a slowing in the productivity of labour. Here is a figure generated by JPMorgan economists recently. There has been a secular fall in the fixed asset investment to GDP in the advanced economies in the last 50 years ie starting from the 1970s.

Part of the decline in US capital and labour investment can be laid at the door of increased globalisation as American companies went overseas for their factories and activities. But investment to GDP has declined in all the major economies (with the exception of China).

In 1980, both advanced capitalist economies and ‘emerging’ capitalist ones (ex-China) had investment rates around 25% of GDP. Now the rate averages around 22%, or a more than 10% decline. The rate fell to 20% for advanced economies during the Great Recession.

JPMorgan’s economists note that situation is becoming serious. Growth in global business investment in new equipment is grinding to a halt for the third time since the Great Recession ended in 2009.

And the JPM economists comment: “Even more concerning is that the latest survey data suggest the capex growth slowdown has yet to find a bottom.” Their proxy model forecast is for zero growth in 2019.

So secular slowing of productivity growth comes from the secular slowing of more investment in productive value creating assets. The next question follows: why did new investment in technology begin to drop off from the 1970s? Is it really a ‘lack of effective demand’ or a lack of productivity-generating technologies? More likely it is the Marxist explanation: businesses in the major economies experienced a secular fall in the profitability of capital and so began to think that it was not profitable enough to invest in heaps of new technology to replace labour.

The figure offered by JPMorgan on the long-term decline in fixed asset investment is perfectly matched by the long-term decline in the profitability of capital in the major economies (see graph below).

A world rate of profit – average of 14 major economies (profits as % of fixed assets)

This has been strikingly clear in the post Great Recession period. In many major economies like the US, the UK, Japan and in Europe, companies have preferred to keep their labour force and then employ new workers on more ‘precarious’ contracts with fewer non-wage benefits and part-term or temporary contracts. That is revealed in very low official unemployment rates alongside low investment rates. Thus productivity growth is poor and overall real GDP growth is below-par.

And the share of investment in the productive value creating sector of the major economies has also declined because of the increase in investment in unproductive labour and sectors ie. marketing, commerce, finance, insurance, real estate, government (particularly arms spending etc). These sectors sucked up an increased share of surplus value, thus lowering the profitability of the productive sectors.

Here is a chart produced by Australian Marxist economist, Peter Jones, from his new book, The Falling Rate of Profit and the Great Recession, which decomposes the factors affecting the rate of profit in the productive sectors of the US economy: (s-u)/C. The factors lowering profitability are: 1) a rising organic composition of capital a la classical Marxist analysis (green bars); and 2) the rise in the share of unproductive labour (blue bars).

Over the long term, these factors have overwhelmed any counteracting factors that raise profitability like a rising rate of exploitation of labour or the cheapening effects of new technology. No wonder, fixed investment rates have been falling and thus productivity growth.

JP Morgan economists also note that the slowdown in productive investment is driven by slowing profitability (which leads to a lack of business confidence to invest): “the projected slowing in capex growth owes entirely to weaker confidence and profit growth relative to past years.”

But there is one other key factor that has led to a decline in investment in productive labour: the switch by capitalists to speculating in fictitious capital in the expectation that gains from buying and selling stock market shares and government and corporate bonds will deliver better returns than investment in technology to make things or deliver services. As profitability in productive investment fell, investment in financial assets became increasingly attractive.

The growth of fictitious capital has been a long-term feature since the trough in the profitability of capital by the early 1980s. The share of financial sector profits in total profits in the US and other capitalist economies rose at an increasing rate up to the global financial crash – note that this share only really rocketed from the 1980s.

And much of this investment is fictitious (as Marx called it) as the prices of stocks or bonds may bear no relation to the underlying earnings of assets of companies, and these prices can dissolve in any financial crash.

Peter Jones in his book provides one measure of the amount of financial profits that are fictitious and there are other new studies on their way. But one crude but simple measure of the size of fictitious capital can be based on Tobin’s Q. Named after the leftist economist James Tobin of the 1970s, it measures the ratio between the market price of equities against the book value (or price) of the fixed assets of companies in an economy. The ratio thus expresses the fictitious portion of financial assets.

We can see that in the bull market in stocks from the early 1980s up to dot.com bust in 2000, the market value of US companies was some 70% above money value of company assets.

Given that the long-term average ratio of Q is about 70 not 110 as now, you can thus gauge the extent of the fictitious part of buying financial assets.

So while the stock market booms, with the help of near zero interest rates and quantitative easing, the profitability of productive capital stays low – and along with it, low investment growth and poor productivity growth.

26 Responses to “Productivity, investment and profitability”

How are you measuring output? Marx in Theories of Surplus Value sets out why productivity can only be measured in terms of quantity of use values per hour/day etc. But bourgeois economics tends to measure productivity in terms of the exchange-value value per hour. As Marx describes, this is necessarily wrong, because a necessary consequence of rising productivity is to reduce the unit value of outputs. The total exchange value of output rises, because the total output of use values rises faster than the fall in the unit value of outputs (reputedly though there is no theoretical reason why this has to be the case), this is the fundamental basis of Marx’s Law of The Tendency For the Rate of profit To Fall, but it will, thereby always underestimate the real rise in productivity.

Moreover, there is the question of hedonic pricing in the calculation of inflation, GDP and productivity. Can we really compare productivity of say mobile phones between now and 1995, given the qualitative changes in the use vale of mobile phones during that period? So, for example, has productivity fallen or risen, because today instead of producing 100 million cameras, 100 million phones, 100 million SatNavs’ etc. we have the same or less labour producing just 100 million smart phones that in one device does the job of all these formerly separate devices?

Finally, with 80% of new value added and surplus value coming from service industry, how is it possible to effectively measure output in terms of use value anyway? How do you measure output effectively when it comes to the amount of data traffic across the Internet for example? I’d suggest that if you look at the massive expansion of bandwidth of the internet, and the amount of incrase in traffic across it, for a whole series of services and activities, there has been a massive increase in its output for very little increase in labour employed to achieve it.

“But bourgeois economics tends to measure productivity in terms of the exchange-value value per hour.”

That is simply not true. Bourgeois economics doesn’t have a concept of exchange value. Exchange value is directly anchored in value, so if bourgeois economics did it, calculation “a la Marx” would be even easier.

And money is still — ultimately — anchored in value (be it fiat or not), so, in total output, it still pans out.

I was using exchange-value generically, and in its Marxist context. As Marx sets out in Capital III, for total social-capital the total of prices of production equals total exchange values. In measuring changes in national productivity, bourgeois economics measures changes in those total prices, which equal total exchange-values.

Or as you say, “money is still — ultimately — anchored in value”, and as bourgeois economics measures productivity using total money prices it amounts to the same thing.

Not true. Exchange-value is a concept and category used by Smith, Ferguson, Malthus, Ricardo, both Mills, Say and so on. Indeed, it was Ricardo’s attempt to make market prices revolve around exchange-values rather than prices of production that led to the contradictions in his system that led to the disintegeration of the Ricardian School.

The whole of the value of financial assets is fictitious as Marx describes in Capital III. It is fictitious because it has no independent power of self expansion.

The price of financial assets is based upon the capitalised value of the revenue of the asset, i.e. interest/dividends, just as the price of land is based upon the capitalised value of rent. And, as Marx explains capital as capital, like land has no value, because neither are the product of labour.

Land produces rent, only because the monopoly of landed profit is able to appropriate surplus profits, i.e. profit over the average profit. Similarly, the owners of loanable money-capital are able to appropriate interest, because industrial capital requires to borrow money-capital from them. That is what happens when a company issues a share or a bond. The rate of interest, Marx then explains is determined by the interaction of the demand and supply for this loanable-money capital.

But, the interest like the rent is not an independent self-expansion of value. It depends upon industrial capital producing profits out of which interest is appropriated, or surplus profits out of which rent is appropriated. That is why, as Marx sets out in TOSV, the rate of interest can never be higher than the average rate of profit.

What the industrial capitalist borrows is the use value of capital, i.e. capital as a social relation. Its use value is to be able to produce the average rate of profit. If the average rate of interest was higher than the average rate of profit, Marx says, then the industrial capitalist would make losses after having paid the interest, so there would be no point in borrowing the money-capital.

The price of shares, as with the price of bonds is merely the capitalised value of the revenues they produce (coupon or dividends). But shares and bonds are merely a legal form of debt instrument. They have no independent value, they have no potential for an independent self-expansion of their value, as industrial capital has. They are entirely fictitious capital.

Thanks for your reply. I would also be grateful for clarification on the other point about how you are measuring productivity.

But, further on this point about fictitious capital, and fictitious profits, I would still like some clarification.

Surely the point here come down to Marx’s distinction between money-lending (interest-bearing) capital, as opposed to money-dealing capital.

Marx defines money-dealing capital as a form of merchant capital. As with any other form of merchant capital it claims the average rate of profit on the capital advanced. It does this in the charges/commissions it levies for the money-dealing services it provides. Those money-dealing services are in relation to firms such as Paypal, the collection and payment of moneys for goods and services bought and sold, or for Forex companies the administration costs etc. for changing currencies and moving money from one currency regime to another etc.

Included in this would also be the profits of factors, who take on responsibility of collecting payments from customers, in return for a commission. I would have to think about it more carefully, but I would suggest it also includes the profits of insurance companies who take on and collectivise the individual risks of companies, for a premium. Other financial services, such as investment advice for which the provider charges a commission, would also come under the heading of money-dealing capital, and the profit obtained would thereby be a commercial profit.

As Marx sets out in analysing commercial profit in Capital III, commercial capital does not create additional surplus value, and none of these activities, thereby constitute a production of additional surplus value. However, what Marx does set out there is the difference between surplus value and profit, and most importantly in this context realised profit.

The merchant capitalist does not produce additional surplus value, but by reducing the cost of circulation, they do increase the amount of realised profit. That is why the productive-capitalists hand over this activity to commercial capital – including money-dealing capital – because although it does not increase the produced surplus value, it does increase the mass, of realised profit, and thereby the general annual rate of profit, and its on that basis that commercial capital like any other capital claims its share of that total profit, as average profit on its capital advanced. Moreover, as Marx explains in Capital III, because this commercial capital, including money-dealing capital, reduces circulation times, it thereby also significantly increases the rate of turnover of capital, and again thereby raises the general annual rate of profit.

Some time ago, I referred to an article in the US magazine The Banker, which bemoaned the fact that in the US it took many days to process payments there, compared to the speed of payments through the banking system in Europe.

By contrast, there is the investment banking activities, i.e. speculation undertaken by banks and financial institutions. If we take interest payments on loans by banks. We might want to ask the question, whose money is being loaned. To the extent that banks take in money on deposit from customers, and then lend it out to borrowers, they are again essentially acting as money-dealing capitalists, the difference in the interest charged to the interest paid, being essentially a charge for bringing lenders and borrowers together. But, of course we know that bank credit depends upon the bank itself creating money via its lending operations.

The interest the bank/financial institution obtains is not profit, but interest. As interest it does not have to be the return of the average rate of profit on the capital advanced, and cannot be for the reasons Marx describes, but is merely an average rate of interest. That applies obviously to the coupon it obtains on bonds, and dividends on shares it buys. These, unlike the actual profits obtained by money-dealing capital, or simply a deduction from total profits produced by industrial (productive and commercial) capital.

Similarly, a considerable amount of what is described as financial profits are not profits at all, but merely capital gains from changes in the prices of speculative assets. They should be discounted completely.

On the question of productivity, my view is that all the issues of use value and value in measuring productivity growth can be overcome with careful analysis of the official sources and several Marxist economists have made considerable progress in identifying productive and unproductive labour and their size, as well as dealing with the issues of so-called services in the official definitions.

The problem in this discussion between Michael and Boffy is the deflator. The BEA does try and reduce output to volume by removing the distortion of price increases (generally). Theoretically if a correct deflator is used then prices should be zeroed out thus revealing the volume output on which productivity is based. So for example if the price of output goes up 5% and this is due to prices rising 2% and volume 3% then it is clear that deducting 2% from 5% reveals the output increase of 3%. The real problem is somewhat different. The BEA seeks to zero prices, but when measured in labour time, prices may be falling because of rising productivity. So the deflator may be too small and thus actual output and hence productivity tends to be underestimated. This is the general case under capitalism.

Just to clarify on the point of interest and the rate of interest as opposed to profit and the rate of profit, interest is a deduction from profit, in the same way that rent is a deduction from industrial profit. Both derive from the separation of the owners of these particular use values from industrial capital.

Rent arises from the monopoly of landed property, which enables it to appropriate surplus profits arising in primary production, as the primary producers must utilise the use value of the land to produce. Interest arises from a similar monopoly of ownership of capital – primarily money-capital – whose use value again the industrial capitalist must utilise in order to produce. When capital becomes predominantly socialised capital at the end of the 19th century in the form of cooperatives and corporations this distinction as Marx and Engels describes becomes particularly acute.

As Marx says,

“It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest.”

(Capital III, Chapter 23)

And, as Marx sets out there, and further in TOSV, just as when the primary producer is also a landed proprietor they split themselves in two, seeing a part of their profits coming to them, only as the rent they would have obtained on the land they own, the other part deriving from their activity as a productive-capitalist, so too with the industrial capitalist who uses their own capital to engage in production, rather than borrowing it. They see their profit also dividing in two, a part being the return to capital as capital, i.e. interest, and the other being their industrial profit, which they see as being a result of their own entrepreneurship, and skill as a manager.

In fact, as Marx sets out in Capital III, Chapter 23, if it were not for this division of capital into money-lending capitalists and industrial capital there would be no category of interest. That part of financial profits derived from interest, including interest on bonds and dividends on shares, should not be viewed as additional profits, but nor should it be discounted from the total profits of the total social capital, precisely because it is a deduction from industrial profits. If those interest payments were not deducted from industrial profits, in other words, industrial profits would be larger by that amount (assuming that the figure for profits cited is not the EBITDA).

As Marx sets out in TOSV III, the industrial capitalist sees both interest and rent as a cost of production – which is why the Riracdians proposed nationalisation of the land, so that all rents went to the state so as to reduce taxes on industrial capital.

“The problem in this discussion between Michael and Boffy is the deflator. The BEA does try and reduce output to volume by removing the distortion of price increases (generally).”

This is irrelevant. It only deals with the question of inflation, i.e. changes in money prices resulting from changes in the value of money/money tokens. The issue is the fall in the actual value of commodities resulting from rising social productivity.

It is fundamental not irrelevant. Yes the deflator deals with the money side of the equation. It seeks to correct for the depreciation of money. If the value of money is stable it becomes a reliable standard of price. However rising productivity should result in falling prices not stable prices. Hence concretely, that is in the real world, deflators tend to be understated because their purpose is to zero out prices.

“The whole of the value of financial assets is fictitious as Marx describes in Capital III. It is fictitious because it has no independent power of self expansion.”

Then all of capital is, or becomes “fictitious” as capital, viewed as a “thing” as a “moment” as an organization of the means of production as value absorbing has no independent power of self-expansion. It capital has to engage wage-labor to expand.

The relation of finance capital, of financial assets, to capital is no more fictitious in all cases than the relation of money to commodities is always fictitious. Rather money represents the essential abstraction at the heart of commodity production.

Most financial transactions don’t even register as “capital”–these are simply ways a)distributing profits and b)reconciling the uneven turnover times of the various capitals. Options, futures, bonds, stocks, commercial paper markets all play both roles.

Other than Madoff type schemes,exactly what constitutes “fictitious capital”? Does the paper behind the financing of a container ship represent “fictitious capital”? I don’t think so. It can appear as fictitious capital, as worthless paper, when the containership can no longer generate a profit; when it is laid up at anchor.

Asset back securities represent real claims on real assets, real revenue generating assets. The overleveraging that always accompanies these mechanisms does not mean the paper is always “fictitious;” The collapse of the market in ABSs should prove that– it was triggered not by some fraudulent scheming, although fraudulent scheming is always a part of these operations, but by the growing default rate among those who had mortgaged property, extracting the imputed value from homes to either finance daily living requirements or further asset purchases.

“Land produces rent, only because the monopoly of landed profit is able to appropriate surplus profits, i.e. profit over the average profit. Similarly, the owners of loanable money-capital are able to appropriate interest, because industrial capital requires to borrow money-capital from them.”

Except landed isn’t capital. It can assume a value form, can act “as if” it were capital when its imputed value is securitized and circulated (as in one of the great contributions of the French Revolution to developing capitalism, the assignat)

There is no monopoly on loanable money-capital, appropriating surplus-profits; there is no separation of the owners of loanable money-capital from the “industrial capital.”

We should not conflate land with money capital, rent with interest, and both rent and interest with “surplus profit.”

I agree with all your arguments. But one issue not addressed is why the computer-based logistics “revolution” hasn’t raised productivity. I suppose it’s because more efficient product transport just decreases turnover time of capital.

One thing is the “computer-based logistics” sector per se — it may or may not be growing. It may grow thanks to prices of production, but, in the long term, they will see a fall in the rate of profit because those “computer-based” sectors tend to have a high organic composition of capital.

Another thing is total (social) capital. Logistics, by definition, can only increase profitability by reducing the costs of circulation of commodities. Once this windfall ends (this technology becomes the norm), social profit rate will resume to fall, driving the “computer-based logistics” sector’s own profit rate down.

There are country-by-country reasons for some of the productivity slowdown, but the overall problems are conceptual and secular.

The main conceptual problem is that productivity is a physical quantity, physical output divided physical inputs, and it is not dollars per hour. This also related to “the economy” being both an engine/machine (the GDP view) and a network of money flows (the GDI view). Looking at “the economy” as a network of money flow is a typical right-wing framing.

The secular problem is that the physical productivity of “the economy”, the on that really matters, does not depend very much on “technology” intended as “great inventions” as Gordon imagines. That is also a right-wing framing, the Ayn Rand idea that all value comes from “creative geniuses”.

The big deal is that the overwhelming part of the increased in physical productivity over the past 200 years at least has been the diffusion and improvement in the use of fuels, coal and oil, much cheaper and more energy dense than “food”. Before coal and oil we had mostly muscle power fueled by “food”, that is farmed vegetable.

Engine power fueled by coal and oil is enormously more productive, and that is not so much because of engine technology, which merely exploits the higher energy density and cheapness of coal and oil wrt food.

A driver of a tractor can till in 2 hours what a peasant with an ox can till in 6 days, but that enormous increase in productivity is not because of the tractor, but of the petrol that powers it being so much cheaper and more energy dense than hay. A tractor powered by hay would probably not be competitive with the ox.

The past 200 years in the “first world” have been a story of the wider diffusion and then more efficient exploitation of coal first and oil second. Consider commercial transport with horse carts: first some horse carts are replaced with coal powered railways or truck, than the engines of the latter improve. Once all horse carts have been replaced with coal or oil powered vehicles, and their engines have been improved to make the most efficient use of that fuel, productivity stops growing as fast.

And that’s the secular problem: in the first-world the diffusion and improvement of coal and oil based machines have become pretty much complete, and no third-wave fuel cheaper and more energy dense than oil has been discovered yet.

I don’t quite buy the argument that improvement in energy sources accounts in more than just part for the technology slowdown. The shift from steam locomotive to diesel locomotives greatly improved ton-miles operated per locomotive hour per crew hour A similar jump in productivity exists when comparing current diesel locomotives to those of the 1950s, despite the use of the same diesel oil as the energy source.

Just an aside: could we please demand a mandate from FASB/SEC/IFRS (or whomever is appropriate) that publicly listed corporate Income Statements, globally, include a line item for the annual payroll checks paid (not stock options, but salaries)? It would help.

Mr. Roberts, thank you for posting these charts. I’m studying/reading Capital right now, and it’s a big help to learn about the actual modern data. One thing that stands out to me here is the relationship between the fixed capital investment cycle and the other cycles. In Capital Vol. 2, Marx says,
“One may assume that in the essential branches of modern industry this life-cycle now averages ten years. However we are not concerned here with the exact figure. This much is evident: the cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises. During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle.”https://www.marxists.org/archive/marx/works/1885-c2/ch09.htm
He implies that the actual turnover cycles (primarily of longer-lived fixed capital) are the basis for the rest of the market cycle. This would also include the cycle of the profit rate. What would be the consequences of this?
– Credit and loans (and speculation) become more available the closer the mass of fixed capital is to the end of its lifespan, as one way or another the money for the replacement fixed capital has to be saved up and stored in a bank (it’s more complicated in real life, with part of these savings themselves being used in speculation)
– The end of the life of the mass of fixed capital heralds a shrinkage of bank reserves as the industries have to spend their savings?
– Rate of profit is reduced by the new fixed capital
– Drop in new investments for all of the reasons above, including the lack of need for new fixed investment
I am wondering if you could include discussions and data of fixed capital and turnover more in your posts. Maybe you could elucidate some things here.

Thank you for the response, and I do plan to read the book. However, I’m specifically interested in this argument, “This much is evident: the cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises.” Since Marx doesn’t really give much detail on this idea (at least as far as I’ve read), it seems like it merits more investigation. It would somewhat contradict the idea that the ROP regulates the market cycles, as it’s saying that the turnover cycles are the basis. Now, the ROP certainly does regulate investment and many other things as a consequence, but if turnover regulates the ROP cycle, then it deserves a lot more discussion. In any case, the bullet points I posted above (– Credit and loans (and speculation) become more available… etc) were partially a question. Do those seem plausible/accurate to you, or am I misunderstanding some things?